Reduce your estate tax by contributing to your grandchild's tuition

from www.nydailynews.com






A granny of a tax break for tuition
BY PHYLLIS FURMANDAILY NEWS BUSINESS WRITER
Monday, July 2nd 2007, 4:00 AM

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When it comes to paying for school, grandparents can help their grandchildren - and themselves - at the same time.
As tuition plus room and board at private colleges hit an average of $30,367 last year, a survey by AIG SunAmerica Mutual Funds found more than half of grandparents plan to help. One-fifth said they would shoulder as much as 75% of the college costs.
What these do-gooder grandparents may not know is that contributing wisely to their grandchildren's future can also help them save on estate and gift taxes.
The key is paying the money directly to the school.
By doing that, you reduce the value of your estate and avoid the gift tax that is generally triggered when you give away more than $12,000 to any one individual in a year. This gift-tax break applies to all schools, from nursery to college to grad school.
"You get it to have it both ways," said Robert Burkarth, a CPA in the Stamford office of financial planning firm Householder Group. "You get to transfer the money to benefit the child, and pay a lot less in gift or estate taxes later."
Remember, the tuition must be paid directly to the school, said Howard Sharfstein, a trusts and estates lawyer at Schulte Roth & Zabel in Manhattan. "If you reimburse your child for that child's payment of his child's educational expenses, that is a taxable gift."
Grandparents can contribute to a 529 college savings plan too. But in that case, once you get past a $12,000 contribution, you are subject to the gift tax.
There is an exception. You can give up to $60,000 to a 529 plan in one shot, but you won't be able to give any more gifts for the following four years without triggering the gift tax.
Recently, the IRS made it even easier for grandparents to pay tuition directly to schools, issuing a ruling that allows you to prepay multiple years of tuition in advance. That's good for people who feel they won't live long enough to see their grandchildren through college.
The tuition is not refundable, Burkarth said. So if your grandchild is the kind of kid who might switch schools midstream, this may not be the right strategy.
Of course, before you take out your checkbook, take a look at your own finances and future needs. As much as you want to help out your children and grandkids, you may have more years ahead of you than you think.
pfurman@nydailynews.com